Karmazin, Convertibles, Conspiracies... and Goldman???

Okay, first things first -- let me say that I'm not one to normally subscribe to conspiracy theory's. I had been very critical of Michael Hartlieb in the past - and his Sirius/XM interop conspiracy... as well as others surrounding Goldman and whatever else... but something smells not quite right...

There had been talk on this board (I believe) about what Goldman was up to -- why their analyst blasted Sirius/XM, while Goldman held on to so much of Sirius' Feb09 debt. I was skeptical at first, then later started to wonder. I noted it my head to keep an eye on this, then wham -- it hit me this past week. I don't wish to start a new conspiracy -- I only want to express my observations and make everyone think for a moment about this. Karmazin made a comment this week at the ML presentation that started me to wonder. (I attached in a zip file, an audio clip of that comment -- with the transcript here):

We currently have a Sirius convert of $300 million, that is due February of 2009. We have already had conversations with banks about securing the cash, okay, in order to take out that convert. You shouldn’t be surprised that the holders of the convert have been very anxious to talk to us about, “gee, we’d like to exchange that for another piece of convert”. That is not the interest that the company has. The company has, is that we will raise the debt – the combined with our approximately $450 million of cash that was on our balance sheet, the last time we report it, which was the end of June. So there was $450 million of cash, we are looking to raise bank debt – probably senior secured, because we have basket in which we can do that. Probably a term that will be a couple – three years – short term; and that will take out that issue. When will we do it? We will do it, this time more opportunistically than we did, last time. When would I like to do it? I’d like to do it, sooner rather than later. Because I’d like to get this question mark out of everybody’s mind, “What are you going to do about that Feburary 2009 convert. The market, based on everything I’m told is assuming we may have to raise equity to deal with that. So let me resolve that as fast as I can – and show that I don’t need to do that. And I think that that would look positive.

So what has me wondering? This line, "You shouldn’t be surprised that the holders of the convert have been very anxious to talk to us about, “gee, we’d like to exchange that for another piece of convert”."

I believe it was Brandon (I'll give proper credit where credit is due) that pointed out how much of these maturing Notes that Goldman has. The question in my mind is, what gives? I think I have a possible reason now...

Goldman has little to lose by Sirius taking out this debt, via them raising a new bank loan to buy back this maturing debt -- but they have a lot to gain by Sirius being forced into offering "the holders" of this maturing debt an exchange for a new convertible note... no???? Think about it... If Sirius was forced to exchange for a new convertible -- with the new note having a higher coupon, than the current 2.5% -- with a much lower convertible price, than the current $4.41/share price... no???

Worst case scenario, is the convertible notes get bought back -- best case scenario, the notes get exchanged for new ones with a higher coupon and a lower convertible price. Which do you think is in the best interest of Goldman??? Goldman currently holds $127.8 million of this $300 million in maturing notes... that is 42.6% of the notes. Think about that! The hold over 40% of the notes -- and Karmazin says that they have been contacted by these note holders who said, "we’d like to exchange that for another piece of convert". It's easy to believe that Goldman is one of those saying this. And with Karmazin and Sirius saying, no -- we just want to buy them back... how do you think that Goldman is going to respond, knowing that they can benefit greatly by a new convert??

I'm not going to delve in to the whole connection between Goldman and Cramer -- and his all of a sudden turn around recommending that investors "buy Sirius debt"... but it does have to make you wonder??

If Goldman can put pressure (via Weinkes' bearish call on Sirius) -- keeping the pps down; could it not also continously (and quietly) bash the company/stock and put pressure on them to take the convertible exchange offer and make it difficult for them to obtain a bank loan -- instead of having their notes bought back? It makes me wonder.

The fact is, Goldman has nothing to lose -- because Sirius has to buy the maturing notes back -- and a lot to gain by keeping the pps down and keeping a bearish outlook on the company to make it difficult for them to refi this maturing debt -- forcing them to take their exchange offer.

The whole thing stinks -- and me (the guy that doesn't buy into conspiracy theories) -- makes me wonder just how much Goldman is manipulating this stock. I think the sooner that Sirius raises the bank debt (preferrably), the sooner the pressure will be taken off of this stock. We're really starting to see just how much an investment company like Goldman can have an impact on a large company like Sirius. And from what I hear -- its not the first time that Goldman has done something like this.

The week before last during the SiriusBuzz radio broadcast, I asked that question in the chatroom. Tyler answered it on the broadcast by saying that he felt there were a lot more options to Mel at this point, so Goldman may not have as much leverage as they would need to play this game.

But you're right about them not having a ton to lose. They already shorted the converts when they bought them. They'll make more money driving the stock down, covering, and then going long. I might be wrong there, but that's my take.

I think Tyler and Mel are right, but Goldman played the game anyway.

I was listening to the cc live. When Mel said that about the converts and that the holders wanted to get new converts, and that he wouldn't need to do it, I smiled. I thought, "Yes! screw Goldman". It was about at that point that the stock started down. The whole thing had this feel of a kid throwing when they found out they weren't going to get what they want.

I admit, I did start feeling a little nervous the end of last week and wondered if I was missing something. I kept buying though because it seemed the sellers didn't really know why they were selling.

Goldman could have played win/win. They chose not to. They could have called Mel and offered to roll their converts keeping the terms in place, or dropping the convert price modestly or something. Instead they got greedy.

I sure hope Mel sticks it to them. I'd look forward to seeing all those pearly whites as he grins from ear to ear...

Interesting Homer... But what if Mel wanted SIRI to buy back some shares? It might be good that the price keeps going down. What does a company have to do to buy back? (How much notice is given?, do they name their price?, etc?)

There was the debate about buying back versus paying debt. I say they could do both if the price was right. Announce a refi/convert buyout and a buyback on the 6th to get a pop and attention on the new radios and price packages.

So I say we all let the price go down to the basement, hop on for more shares and ride 'er to the 2nd floor. At the 4th quarter conference call we're back to three bucks.

Homer... Very interesting point of view, and it would be hard to disagree with you on this...

Do you happen to know what the strike price is for the November convert? I remember somewhere hearing that there was another convert coming due sometime in the near future with a VERY VERY low strike price... know anything on this?

Honda Motors has a $33.2 Million convert with XM that was $3.18 convert price and now with Sirius is a $.6913 convert price matures on 12/21/09 that will probably convert. Sirius has a $1.75 Million note matures 9/29/09 which will probably be paid in cash. Other that I think the $300 Mil convert in Feb. 09, the $250 & $100 Mil Bank Facility expires/due in May 09, and the $400 Mil maturing in 12/09 is all they have (not to minimize it). If there's anything else out there that would be a surprise. These numbers came to me from Homer985 on a previous discussion and verified by me in reviewing the SEC filings.